Individual’s Unsubstantiated Deductions Denied; Penalties Upheld

UNITED STATES TAX COURT ALKA SHAM,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Filed August 12, 2020

Alka Sham, for herself.

Christopher D. Davis, for respondent.

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CONTENTS

Conclusion

Appendix A: Income items

Appendix B: Deductions

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MEMORANDUM FINDINGS OF FACT AND OPINION

GUSTAFSON, Judge: The Internal Revenue Service (“IRS”) issued to petitioner, Alka Sham, a statutory notice of deficiency (“SNOD”) pursuant to section 6212¹ on February 17, 2017, determining deficiencies in Ms. Sham's Federal income tax (plus penalties and additions to tax) for the years 2010 through 2015, as follows:

[*6]		Penalty	Additions to tax
Year	Deficiency	Sec.6662	Sec. 6651(a)(1)	Sec. 6651(a)(2)	Sec. 6654
2010	$14,804	$2,961	—	—	—
2011	17,716	3,543	—	—	—
2012	18,749	3,750	—	—	—
2013	21,520	4,304	$969	—	—
2014	54,979	—	12,370	(1)	2$987
2015	21,436	—	4,823	(1)	386
1To be determined.
2Before trial, the Commissioner conceded the section 6654 addition to tax for 2014.

Ms. Sham filed a timely petition under section 6213(a) for redetermination of the deficiencies, penalties, and additions to tax. After the parties' concessions of various issues, we must decide: the amount of Ms. Sham's income for the year 2014, whether she is entitled to certain deductions she claimed for the years 2010 through 2015, and whether she is liable for the penalties and additions to tax determined by the IRS (with the exception of the section 6654 addition to tax for 2014, which was conceded). We uphold the IRS's adjustments in large part, and we mostly deny the additional deductions that Ms. Sham claims. We uphold the additions to tax and the imposition of the accuracy-related penalties under section 6662.

[*7] On the evidence before us, and employing the burden-of-proof principles set out below, we find the following facts.

I. FINDINGS OF FACT

A. Background

Ms. Sham has two master's degrees. She was an investment manager for several years, managing three portfolios.

B. Unemployment in 2010

In 2009 Ms. Sham had a dispute with her then employer that precipitated a serious illness. Ms. Sham left work for that employer in 2009 and had major surgery in 2010. She had many medical appointments in 2010 and often used a taxi or public transit to travel to and from her appointments. That same year she paid a lawyer $6,100 to negotiate a settlement with her former employer and eventually reached an agreement, pursuant to which she remained at home, unwound positions in the portfolios she managed for her former employer, and collected $136,154 in settlement of a dispute that required her former employer to compensate her “like an executive” during that time. Also in 2010 Ms. Sham paid a different law firm a retainer of $1,250 to represent her in a matter entitled MH Residential I, LLC v. Robert Haney, Alka Sham, which did not pertain to her dispute with her former employer.

[*8] During 2010 Ms. Sham resided at an apartment in New York, New York, in a residential building known as the Manhattan House.

Ms. Sham collected unemployment benefits from the State of New York at a rate of $354 per week from December 2009 through January 2011. In 2010 those benefits totaled $18,440, which she reported on her 2010 tax return. We find that Ms. Sham was in fact unemployed for all of 2010.

C. Self-employment in 2011-15

In 2010 Ms. Sham experienced medical problems that caused her to seek employment in a new field. Having had significant experience with the health care industry, she began to work as a self-employed business consultant for Dr. Navrajan Kukreja, an anesthesiologist with whom she had a 15-year personal relationship. Dr. Kukreja did business through three entities — Anesthesiology Consultants, LLC, Perioperative Consultants, LLC, and SMKM Investments, LLC — to which we sometimes refer as Dr. Kukreja's “entities”. Dr. Kukreja's medical business was limited to anesthesiology.

In her work for Dr. Kukreja, Ms. Sham was to negotiate contracts by which the entities would provide anesthesiology services to “ambulatory surgical centers” in New Jersey. Dr. Kukreja engaged her to expand into the unpenetrated parts of the New Jersey and New York markets, but no business ever materialized [*9] there. Ms. Sham also functioned to some extent as a business manager for Dr. Kukreja and his entities. From 2011 to 2015 Dr. Kukreja (through his entities) was Ms. Sham's only paying client. Ms. Sham did not identify any prospect with whom she successfully negotiated a contract for Dr. Kukreja's business or any prospects whom she pursued for that purpose (and neither did Dr. Kukreja).

During the time that Ms. Sham worked for Dr. Kukreja and his entities, she worked approximately 20 hours per week, which included time spent speaking with specialists, visiting their facilities, traveling to meetings, chit-chatting, and reading. She was also an active member of the Financial Women's Association of New York and attended networking events with Young Jewish Professionals, where she engaged with other financial professionals. Ms. Sham ceased working for Dr. Kukreja in 2015 and, as of the date of trial, remained unemployed.

D. Apartment 16A

In November 2010 Ms. Sham signed a lease on a new apartment in New York (“Apartment 16A”). She vacated her previous apartment at the Manhattan House and rented and resided in Apartment 16A from 2011 to 2015; during those years she paid rent on no other residence. (Ms. Sham says that during these years, she lived with friends and rented Apartment 16A only for business purposes, but for reasons we explain below in part II.E.1, we conclude otherwise.) To an extent [*10] that we cannot quantify, she sometimes used Apartment 16A for business meetings, though she also conducted business meetings at other locations, such as restaurants. She did not use any portion of Apartment 16A exclusively for business purposes.

Through 2013 Ms. Sham paid rent on her apartment from bank accounts in her name. In 2014 Dr. Kukreja made a direct payment to the rental company of $35,000 toward the rent on Apartment 16A. In 2015 Dr. Kukreja made another direct payment of $15,000 toward the rent on Apartment 16A.

E. Dr. Kukreja's finances

No financial records of Dr. Kukreja and his entities were offered into evidence, but from the evidence that was offered we conclude that his financial matters were handled in an unorthodox manner, with which Ms. Sham cooperated.

Dr. Kukreja used his personal and business bank accounts to pay expenses that were apparently Ms. Sham's (which she reimbursed to an extent we cannot determine); he simultaneously deposited business receipts of the entities (and his own money) into accounts that belonged to Ms. Sham and had her make, from her accounts, payments of his expenses. Before 2014 Ms. Sham was using her personal account ending in -0964 to deposit checks from Dr. Kukreja and also to pay his business and non-business expenses.

[*11] In February 2014 at Dr. Kukreja's request, and using a $100,000 deposit from Perioperative Consultants, LLC, Ms. Sham opened in her own name and with herself as the sole signatory a TD Bank checking account ending in -9232 (“TD checking account”). In May 2014, using a $25,000 deposit from the TD checking account, she opened in her own name and with herself as the sole signatory a TD Ameritrade securities trading account ending in -2245 (“TD Ameritrade account”).

Records of the TD Ameritrade account show short-term capital losses of $157,600 in 2014 and $353,729 in 2015 resulting from trades in that account. In 2015 Ms. Sham also had a short-term capital loss of $35,542 and a net long-term capital loss of $255 resulting from trading activity in another TD Ameritrade account ending in -4516 and titled solely in her name (“personal Ameritrade account”).

Even though Ms. Sham had legal title to these three accounts, Dr. Kukreja had primary control over two of the accounts — the TD checking account and the TD Ameritrade account — and was solely responsible for the activities in those two accounts. Ms. Sham had opened the TD checking account, left Dr. Kukreja with a book of blank checks that she had signed, and then left the country to travel to India. Ms. Sham thereafter signed checks at Dr. Kukreja's direction, but she otherwise had insignificant oversight of the activities on the TD checking account and the TD Ameritrade account.

[*12] With the exception of the initial $25,000 deposit Ms. Sham made from the TD checking account to open the TD Ameritrade account, she was not responsible for the activity on either account. Dr. Kukreja used the TD checking account for his personal use and for the business needs of his entities. He had obtained the password and online login information and performed the securities trades on the TD Ameritrade account. Thereafter in 2014 and 2015, checks from the TD checking account were written for the benefit of Dr. Kukreja and his entities. After trial the Commissioner conceded that only Dr. Kukreja traded with or withdrew proceeds from the TD Ameritrade account. The transfers to the TD Ameritrade account were all either deposits from the TD checking account or wire transfers initiated by Dr. Kukreja. The wire transfers by Dr. Kukreja totaled $119,000.

F. Self-employment income²

Ms. Sham's arrangement with Dr. Kukreja apparently called for her to receive compensation as a percentage of the business income she generated, but it does not appear that she was ever paid on that basis or on any other coherent basis. Her compensation came sometimes in the form of checks payable to herself and [*13] sometimes by checks paid by Dr. Kukreja or one of his entities to cover Ms. Sham's expenses (for example, the $35,000 payment in 2014 and the $15,000 payment in 2015 towards the rental of Apartment 16A).

For 2011-13, the parties have agreed, and we find, that Ms. Sham's gross receipts from self-employment reported on Schedule C, “Profit or Loss From Business”, were $6,451 for 2011, $162,283 for 2012, and $98,790 for 2013.³ On Schedules C accompanying her returns for 2014 and 2015, Ms. Sham reported that her gross receipts from self-employment were $71,451⁴ for 2014 and $36,000 for [*14] 2015.⁵ In his post-trial answering brief, the Commissioner accepts these amounts, and we find that her gross receipts were as reported.

G. Self-employment expenses

1.The claimed expense deductions generally

In her tax returns for the years 2011, 2012, 2013, 2014, and 2015 (described below in part I.L), Ms. Sham claimed deductions for expenses on Schedules C for being in the business of marketing and business development. For 2011, 2012, and 2013, Ms. Sham claimed deductions for expenses on two different Schedules C (without differentiating between the type of business described on each schedule). The expenses for which she claimed deductions include, inter alia, rent, utilities, depreciation, travel, office supplies, local transit, telephone, [*15] business development, meals and entertainment, professional services, and promotional expenses.

The Commissioner has either conceded or did not disallow many of the Schedule C expense deductions claimed on Ms. Sham's returns. Ms. Sham has attempted to substantiate business expenses even where it appears from the record that such expenses are not at issue, and in those instances we do not allow her any additional deduction.⁶

In general, Ms. Sham has established that she paid for many of the items for which she claims expense deductions (though not always in the amounts she claimed on her returns or in this litigation). However, where she has failed to prove a business purpose for those expenditures, we find that she has not proved a deductible expense.

We discuss the disputed expenses below in parts I.G.2 through I.H and explain which categories or items of business and non-business expenses that Ms. Sham was able to substantiate. In part II we discuss the legal principles that [*16] we apply in making our holding, and in Appendix B we tally the allowed items.

2. Travel expenses

a. Car and truck expenses

Ms. Sham reported business car and truck expenses of $9,821 for 2011; $7,372 for 2012; and $7,577 for 2013. She provided invoices related to automobile maintenance and repairs for each of those years of $6,455 for 2011; $5,640 for 2012; and $5,521 for 2013. We find that the amounts on the invoices for automobile maintenance and repairs were expenses paid by Dr. Kukreja, as we explain below in part I.G.4, and we deny those amounts on that basis. Ms. Sham asserts that the remaining amounts of the deduction claimed for each year — $3,366 for 2011; $1,732 for 2012; and $2,056 for 2013 — were mileage expenses, but she did not maintain any vehicle mileage logs as a contemporaneous record of her miles driven, the destination reached, or the business purpose of the use of a vehicle during any of the years at issue. We find that she did not substantiate the car and truck expenses. See infra pt. II.E.5.

[*17] b. Local transportation

During the years at issue Ms. Sham often traveled by taxi, shuttle service, and public transportation. As we explain below in part II.E.7.a, Ms. Sham did not offer any specific evidence of the claimed business purpose of this transit other than her own conclusory assertions. We find that she did not substantiate local transit expenses beyond what the Commissioner conceded as deductible not because of the established business purpose of the expenses, but rather as unreimbursed expenses incurred to facilitate her medical care. See infra pt. I.H.1.

c. Travel for medical conferences

During the years at issue, Ms. Sham traveled to Montauk, New York, and Napa, California, to attend conferences that targeted executives in the medical industry, for which she paid expenses totaling $5,981 in 2012, $2,000 in 2013, $12,743 in 2014, and $554 in 2015.⁷ The Commissioner has conceded on brief [*18] that Ms. Sham met her burden to establish the business purpose for her attendance at conferences and training specific to executives in the medical industry, and we find that these conferences were related to her self-employment. See infra pt. II.E.7.f.⁸

d. Other travel

Ms. Sham also paid substantial travel expenses flying to Amritsar, India; Amsterdam, Netherlands; Paris, France; and Charlotte, North Carolina, and these expenses were not related to her self-employment. See infra pts. II.E.6, II.E.7.f. Some of this travel was to attend classes and presentations in the areas of Ericksonian hypnosis, neuro-linguistic programming, boundaries training, and mind-resonance processing (“MRP”). This training focused on the development of “soft skills” and gave general self-help guidance; it did not develop professional skills specific to Ms. Sham's self-employment (and for that reason, in addition to Ms. Sham's failure to meet the heightened substantiation requirements for these [*19] items, we do not allow deductions sought for this training for the proffered reason of “professional development”, as we explain below in part II.E.7.f). Dr. Kukreja did not have any business use for the development of skills involving Ericksonian hypnosis, neuro-linguistic programming, or MRP, nor was he seeking to expand his medical practice into these areas. Over the period that Ms. Sham traveled to attend training for Ericksonian hypnosis, neuro-linguistic programming, and MRP, she was also recovering from trauma and, in 2014 and 2015, separating her affairs from those of Dr. Kukreja, who she believed had a negative psychological impact on her.

Other of Ms. Sham's travel in these years included visits with relatives, and we do not find that these trips related substantially to her business or to developing client prospects. Ms. Sham has not established that the remaining travel or other expenditures for training relating to soft skills development have a business purpose, and we find that these were not related to her self-employment.

3. Meals and entertainment

Ms. Sham reported deductible expenses for meals and entertainment of $1,255 for 2014 and $433 for 2015. The parties agree that Ms. Sham paid $1,255 in 2014 (the amount she reported on her return) and $1,000 in 2015 (more than she [*20] reported on her return) for business-related meals and entertainment. But see infra pt. II.E.7.g.

4. Expenses paid by Dr. Kukreja

With regard to deductions claimed for expenses that were paid by Dr. Kukreja “again[s]t [Ms. Sham's] income” for any given year, we find that Ms. Sham is not entitled to these deductions because she did not incur the expenses associated therewith. Rather, we find that as a result of the method she employed to calculate her gross receipts, in which the amounts she paid (or repaid) to (or on behalf of) Dr. Kukreja were subtracted from her gross receipts, she was not ever charged with the income that was used to purchase these particular items that she claims were her expenses.

Moreover, the Commissioner does not now argue that Ms. Sham should be charged with gross income in the amount of the expenses Dr. Kukreja paid on her behalf.⁹ The nature of the arrangement in which Dr. Kukreja paid for items Ms. Sham contends were for the use of her business eliminated the possibility of deducting those items; they were either already subtracted from her gross receipts [*21] (by Dr. Kukreja) or, if not so subtracted, had no effect on the calculation of her income in the first instance. These expenses consist of: $6,455 in automobile maintenance and repairs, $5,257 in office furniture, and $2,523 in office repair for 2011; $4,308 in office supplies and hardware, $1,438 in marketing, and $5,640 in automobile repairs for 2012; and $7,630 in office supplies and hardware and $5,521 in auto repairs for 2013. We find that, to the extent the expenses were incurred, they were not expenditures of amounts included in Ms. Sham's gross receipts; we accordingly find that Ms. Sham did not incur these expenses for which deductions were disallowed in the SNOD.¹⁰

5. Reimbursed expenses

There are also occasions on which it appears that Dr. Kukreja paid Ms. Sham as purported reimbursements of expenses she had paid. For example, Ms. Sham deposited a $25,000 check from Anesthesia Consultants on March 4, 2013, with the memo line notation “Exp Reimb.” With the exception of tax year 2014, her gross receipts have been established by stipulation; and it appears that the payments that Dr. Kukreja made to Ms. Sham and that he characterized as [*22] reimbursements were accounted for in the parties' stipulated method of deriving Ms. Sham's income for these years. Thus, if she had showed that the reimbursement was indeed for a deductible expense that she had actually paid, then she might be entitled to a deduction, notwithstanding the reimbursement.

However, Ms. Sham has not established for any of the years at issue any specific expenditures from her own income that correspond with any particular expense repayment. Accordingly, we find that she is entitled to no additional deductions on the supposed basis that she had included in her gross income reimbursements for deductible expenses that she had paid.

H. Medical expenses

1. Deductible expenses

2010. In 2010 Ms. Sham had a major surgery that was very complex, requiring three separate surgeons. During 2010 and the years thereafter, Ms. Sham was very depressed, received much heavy medication, and was treated by multiple psychologists and psychiatrists. Ms. Sham also hired and paid $2,870 to a Ms. Garcia, who assisted Ms. Sham at home during her illness but was not a [*23] medical professional.¹¹ Ms. Sham paid $436 for edible aromatic oils from “Original Swiss Aromati” that were not medically prescribed to her.

The parties agree as to $54,404 in deductible medical expenses that Ms. Sham paid for 2010. Relevant to Ms. Sham's claim for local transportation expenses, see supra pt. I.G.2.b, the Commissioner's concession included transportation expenses of $1,002 that Ms. Sham originally sought to claim as a business expense deduction and then distinguished from her other reported transportation expenses as transportation to and from medical appointments. The Commissioner disputes the deductibility of the $436 for aromatic oils and the $2,870 paid to Ms. Garcia, and he disputes that Ms. Sham has substantiated $600 worth of medical expense payments for services he agrees are deductible.¹² As we explain below in part II.D.1.c, these additional amounts are not deductible, so she substantiated medical expenses totaling $54,404. In part I.H.2.a below we discuss [*24] reimbursement of a portion of those 2010 expenses by Ms. Sham's insurance provider(s).

2011. For 2011 Ms. Sham reported on her return itemized deductible medical expenses of $21,272, and the Commissioner concedes that amount.

2012. Ms. Sham proved at trial that in 2012 she paid $27,602 in medical expenses, an amount slightly larger than the amount of itemized deductible medical expenses of $26,582 that she reported on her return and that the Commissioner concedes.

2013. For 2013 Ms. Sham reported on her return itemized deductible medical expenses of $16,552, and the Commissioner conceded this amount at trial. (Without the benefit of this concession, we would find that she proved only $5,584 in itemized deductible medical expenses, consisting of $2,579 in co-payments and $3,005 for acupuncture, because she took a separate deduction for the expense of self-employed health insurance.)

For 2013 Ms. Sham claimed a separate deduction of $12,561 for the expense of her self-employed health insurance (instead of including that expense among her other itemized medical expenses on Schedule A, “Itemized Deductions”). The Commissioner did not challenge that deduction in the SNOD. At trial Ms. Sham substantiated additional payments for health insurance with [*25] copies of checks she wrote for the premiums, the total amount and purpose of which the Commissioner does not dispute, which bring the total substantiated amount to $18,996. We find she paid this amount for health insurance.

2014. For 2014 Ms. Sham reported on her return itemized deductible medical expenses of $12,017. At trial Ms. Sham argued that she paid $4,095 for insurance co-payments and $2,780 for acupuncture, totaling $6,875. The Commissioner has conceded that Ms. Sham paid the acupuncture expense and that it is deductible, and he has also conceded $520 of the co-payment expense, totaling $3,300 in itemized deductible medical expenses for 2014. Ms. Sham has not proven any amounts over the Commissioner's concessions.

The Commissioner does not dispute — and we find — that in 2014 Ms. Sham paid, in addition to the foregoing medical expenses, $8,605 for self-employed medical insurance.

2015. For 2015 Ms. Sham did not itemize her deductible medical expenses on her return but instead took the standard deduction. At trial she proved only $675 of co-payments for medical services — an amount the Commissioner does not challenge.

[*26] The Commissioner does not dispute — and we find — that in 2015 Ms. Sham paid, in addition to the foregoing medical expenses, $8,831 for self-employed medical insurance.

2. Reimbursements from health insurance

a. 2010

Ms. Sham originally had an individual health insurance plan with United Healthcare Oxford (“Oxford plan”) which had high premiums and strict requirements for covering out-of-network treatment. The policy specified procedures to make claims for reimbursements for certain types of services. The Oxford plan required pre-authorization for all hospitalizations and inpatient or outpatient surgical procedures, which Ms. Sham did not obtain. In 2010 she switched plans to Horizon Blue Cross Blue Shield (“Horizon plan”), which had a deductible; later in 2010 she changed insurance plans again to Empire Blue Cross Blue Shield (“Empire plan”).

During 2010 Ms. Sham submitted her medical expenses to her health insurance provider for reimbursement and did receive some reimbursement payments. Beginning in 2011 Ms. Sham's bank records for her personal checking accounts ending in -0964 and -4477 reflect that she received reimbursements under the Horizon plan and then later under the Empire plan. However, [*27] Ms. Sham's bank records in evidence are incomplete and do not contain any copies of checks deposited in her accounts in the year 2010; they do not contain copies of any checks deposited in 2011 before July. (Ms. Sham provided her monthly bank statements for all of the years at issue but separately provided copies of checks that correspond with certain deposits and withdrawals on the accounts.)

The Commissioner contends that Ms. Sham received reimbursements from her health insurer in 2010. To support this contention he points to: (1) various deposits into her account ending in -0964 that appear on the account statements for 2010, (2) her evident routine, documented for subsequent years, of submitting reimbursement requests to her insurance companies (and receiving reimbursements), and (3) her testimony admitting that she did submit some reimbursement requests in 2010 and did receive some reimbursements. The Commissioner posits that certain deposits into Ms. Sham's account ending in -0964 totaling $14,706 are attributable to reimbursements from insurance.

We find, on the basis of the amounts and frequency of the deposits, the high level of medical care that Ms. Sham received in 2010, and the absence of any other credible explanation for the deposits, that deposits into Ms. Sham's account ending in -0964 that total $10,149 (not the Commissioner's larger total) were [*28] medical expense reimbursements from her health insurance provider.¹³ Her account statements for the -0964 account reflect numerous deposits throughout the year, including regular unemployment compensation and, in the latter half of the year, regular deposits for more significant amounts in “round” increments — e.g., $6,000, $7,000, $10,000. None of those deposits is included in the $10,149 of irregular deposits in “odd” amounts consistent with other insurance reimbursements that Ms. Sham received. Ms. Sham did not show an alternative source for any of these deposits. The preponderance of the evidence shows that $10,149 of the deposits reflects those reimbursements. (This $10,149 amount reduces her $54,404 in deductible medical expenses reported on Schedule A to $44,255. See infra pt. II.D.1.d.)

b. 2011-13

For the years 2011 through 2013 Ms. Sham's own bank statements, which include copies of canceled checks, reflect that the amounts the Commissioner asks us to find are reimbursements of medical expenses were payments from her health [*29] insurance deposited in the relevant tax year. Consequently, the preponderance of the evidence establishes that she received reimbursements for medical expenses in the amounts of $4,112 in 2011, $6,620 in 2012, and $2,377 in 2013.

c. 2014-15

There is no evidence (nor does the Commissioner contend) that Ms. Sham received reimbursements for deductible medical expenses reported for 2014 or 2015.

I. State income tax refund

Ms. Sham made payments of New York State income tax totaling $12,022 for the year 2010, and she claimed her State tax paid as a deduction on her Federal income tax return for 2010. She did not file her New York State income tax return for 2010 until 2014, and on that State return Ms. Sham claimed a State tax refund of $12,022. New York paid Ms. Sham the State tax refund in 2014 and submitted Form 1099-G, “Certain Government Payments”, to the IRS reporting that the $12,022 had been refunded to Ms. Sham in 2014, but Ms. Sham did not report that refund on her late Federal income tax return for 2014 (filed in 2017). We find that Ms. Sham received a refund of New York State income tax in 2014 (and for the reasons stated below in part II.B.2, the inclusion of that refund in her income for [*30] 2014 depends on a computational issue regarding her Federal income tax liability for 2010).

J. Taxable interest and dividends

The parties agreed that Ms. Sham received taxable interest income of $198 in 2011; $104 in 2012; $11 in 2013; and $10 in 2014. The parties also agreed that Ms. Sham received taxable dividend income of $141 in 2013 and $53 in 2014.

K. Charitable contributions

The Commissioner did not challenge in the SNOD the deductions Ms. Sham claimed on her returns for charitable contributions for 2010 and 2011. As we explain below in part I.L, Ms. Sham carried forward all of the amounts she reported for charitable contributions for the years 2012 through 2014 and did not claim any charitable contribution deductions for 2015. Her litigating position is that she is entitled to deduct charitable contributions for each of the years at issue.

Ms. Sham's credit card statements show various amounts of $500 or more that were paid to the following entities which she contends were charitable contributions: on December 1, 2013, a $1,500 payment to “Vipassana Meditation, Shelburne, MA” (classified on the statement as “other purchases and cash”); on September 12, 2015, a $500 payment to “Northwest Vipassana, MA” (classified on the statement as “charities and other organizations”); and on September 13, [*31] 2015, a $60 payment to “Pariyatti, WA” (also classified on the statement as “charities and other organizations”). Ms. Sham did not offer into evidence any receipt or other written acknowledgment from any of these entities.

L. Tax returns

Ms. Sham filed her Federal income tax returns for 2010-13 on the following dates:

Year	Date
2010	Apr. 19, 2014
2011	Aug. 10, 2015
2012	Aug. 17, 2015
2013	Oct. 19, 2015

After filing her petition, Ms. Sham submitted to the IRS tax returns for 2014 and 2015 on the following dates:

Year	Date
2014	July 25, 2017
2015	September 2018

Ms. Sham hired professional accountants to prepare her tax returns for all six years at issue, spending $300 on tax preparation fees in 2013 and $800 in 2014. Ms. Sham's tax returns show that four different professionals signed her tax returns as a “paid preparer” during the years at issue: one in Hauppauge, New York, for 2010; another in Clifton, New Jersey, for 2011 through 2013; a third in [*32] Highland Park, New Jersey, for 2014; and a fourth in Hyde Park, New York, for 2015. She did not call any return preparer to testify at trial.

When testifying about her return positions, Ms. Sham made repeated references to “the accountant”, never distinguishing among the various preparers she used or referring to any of them by name. For example, she asserted that the accountant included her 2014 State tax refund in her Schedule C gross receipts; the accountant determined that she should separate her rent expense onto two different Schedules C and determined how much was “reasonable and customary” as a deduction; the accountant had “done mileage calculations” to explain deductions claimed for business use of a personal vehicle. Depreciation deductions that she could not explain were the accountant's idea. With respect to these return positions, Ms. Sham either could not explain how the accountant postulated the item claimed on the return, or in some instances seemed to disclaim the items, leaving them unexplained. In her closing argument, referring again to what she alleged was the accountant's idea to generate two Schedules C, Ms. Sham implied that she signed a return that she did not understand, after being persuaded by the accountant that “this is the way it is done.”

Ms. Sham made only general statements regarding the information she provided to the accountants to prepare her returns: “I would give them proof of [*33] payments like, how [sic] are the invoices and for 2010 because of the year of the surgery, I was not very well organized. I generally give them a lot of material. So they organized it in whichever way.” She did not provide specific detail about the information she provided to the accountants for each of the years at issue, with one exception: Exhibit 65-P was admitted for the purpose of showing Ms. Sham's contentions as to what she believed her allowable deductions were for 2011. That document contains spreadsheet entries, typewritten and handwritten lists, and calculations — all apparently composed by Ms. Sham — but no original backup documentation to substantiate the numbers on those papers. Describing that document, Ms. Sham stated: “[S]o everything out here is what I would give to the accountant to do the taxes. This is not what you would see on the tax return.” She also attributed the delay in filing her 2014 and 2015 returns to uncertainty about how to treat the TD Ameritrade account and the fact that, while her returns were under audit, her accountant advised her that she was “in bad shape” whether or not she filed the returns.

On line 21 of Schedule A in her tax return for 2010, Ms. Sham claimed “Unreimbursed employee expenses” of $34,563, identified as “Form 2106 Expenses”. On her Form 2106, “Employee Business Expenses”, she reported: $1,220 of “Parking fees, tolls, and transportation, including train, bus, etc.” on [*34] line 2; $3,461 of “Travel expense while away from home” on line 3; $8,441 of “Meals and entertainment expenses” on line 4 (reduced by 50% to $4,221 on line 8); and $25,661 in otherwise unexplained “Business expenses not included on lines 1 through 3”. This unexplained $25,661 was the largest part of her miscellaneous Schedule A expenses subject to the so-called “2% Floor”. At trial and in the parties' stipulations she disclosed that this unspecified amount included $10,000 in rent for the Manhattan House apartment (plus utilities, telephone, and internet expenses associated with that apartment) and the legal fees Ms. Sham paid to both law firms during the year. Ms. Sham did not attach Form 8829, “Expenses for Business Use of Your Home”, to any of her tax returns for the years at issue.

On her tax returns for 2012 through 2014,¹⁴ Ms. Sham reported on Schedule A “Gifts to Charity” of $2,370 for 2012, $3,100 for 2013, and $1,072 for 2014.

The amount reported for 2013 exceeds the amount of the payment in 2013 described above in part I.K, and no evidence of payment was offered for 2012 or [*35] 2014. Ms. Sham could not (and did not) actually claim deductions for the reported amounts because she reported that her adjusted gross income in those years was negative, and her contribution base therefore zero. See 170(b)(1)(A), (G). (Ms. Sham now claims deductions, and the Commissioner challenges them.) On her tax returns Ms. Sham did not report the taxable interest income she had received in 2011-14 and did not report the taxable dividend income that she had received in 2013 and 2014.

On her late Federal income tax return for 2014 (filed in 2017), Ms. Sham did not report the State income tax refund of $12,022 for 2010 that she received in 2014.

Ms. Sham also claimed on her returns losses from the TD Ameritrade account of $157,600 for 2014 and $353,729 for 2015. Limited by section 1211(b)(1), Ms. Sham reported a $3,000 capital loss for each of those years. Consistent with her position that she was not responsible for the activity on the TD Ameritrade account (and was not taxable for its income), Ms. Sham has conceded the losses attributable to those accounts. She attached to her 2015 return the statement for her personal Ameritrade account showing the short-term capital loss of $35,542 and the net long-term capital loss of $255 that we have found she did incur. See supra pt. I.E. (For the reasons we explain below in part II.B.4, [*36] Ms. Sham is entitled to a capital loss deduction of $3,000 for 2015 but not for 2014.)

M. Examination and SNOD

The IRS commenced an examination for the years 2010 through 2015. A Civil Penalty Approval Form approving the assertion of penalties for substantial understatements of income tax and, alternatively, negligence, for the years 2010-15 was signed on December 15, 2016, by the “Group Manager” for the IRS examiner who examined Ms. Sham's returns. On January 24, 2017, having not received a 2014 return or a 2015 return from Ms. Sham, the IRS prepared a substitute for return (“SFR”) for each of those years pursuant to section 6020(b).

As we noted above, Ms. Sham thereafter submitted untimely returns for 2014 and 2015, but she has not made any payments toward her tax liability for 2014 or 2015.

On February 17, 2017, the IRS issued to Ms. Sham its SNOD for tax years 2010 through 2015, determining a deficiency in tax for each year, as well as additions to tax and a penalty.

On May 12, 2017, Ms. Sham timely filed her petition commencing this case. When she filed her petition, she resided in New York.

[*37] II. OPINION

A. Applicable legal principles

1. Burden of proof

The IRS's determination is presumed correct, and taxpayers generally bear the burden to prove incorrect the adjustments made by the IRS in its SNOD. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). A taxpayer's statement in a brief does not constitute evidence, Rule 143(c), and cannot supplement the record, see Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992).

The IRS may rely on information returns (Forms W-2, “Wage and Tax Statement”, and 1099) from third-party payors when determining a taxpayer's taxable income. See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 167 (2003), aff'd, 95 A.F.T.R.2d (RIA) 2004-5490 (3d Cir. 2004). But if “[i]n any court proceeding * * * a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary * * * and the taxpayer has fully cooperated with the Secretary * * *, the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.” Sec. 6201(d).

[*38] For the years 2014 and 2015, the Commissioner relied on the Forms 1099-MISC filed by Anesthesia Consultants to reconstruct Ms. Sham's income when he issued the SNOD. At trial Ms. Sham was able to produce credible evidence that the amounts reported by Anesthesia Consultants were inaccurate, a point the Commissioner conceded. The precise extent of the Commissioner's concessions was to reduce Ms. Sham's gross Schedule C receipts to the amounts she reported when she filed her tax return for each of those years, and gross income remains at issue with respect to only the 2014 return. The Commissioner bears the burden of proof on the issue of Ms. Sham's gross income for 2014. He has successfully sustained that burden, as we show below in part II.B.

The Commissioner bears the burden of proof with respect to “any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer”. Rule 142(a)(1). Ms. Sham contends on brief that the Commissioner's assertion that the expenses Dr. Kukreja “paid against [her] income” are not deductible from her income is a “new repayment theory” and argues that the “repayment theory is unsubstantiated by the evidence on record.” In Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989), we stated: “A new theory that is presented to sustain a deficiency is treated as a new matter when it either alters the original deficiency or requires the presentation of different evidence. * * * A new [*39] theory which merely clarifies or develops the original determination is not a new matter in respect of which respondent bears the burden of proof.” See also Shea v. Commissioner, 112 T.C. 183, 191-197 (1999). The repayment of the expenses for which Ms. Sham claimed deductions goes to the issue of their deductible character and does not alter the original deficiency or require different proof. Accordingly, Ms. Sham retains the burden of proof on the issue of these deductions.

During these proceedings Ms. Sham has either raised new deductions or recharacterized the amounts and the nature of the expenses for which she claims deductions. Even though the newly alleged deductions were not directly addressed in the SNOD, the Commissioner does not bear the burden of disproving deductions that a taxpayer belatedly claims. See Rappaport v. Commissioner, T.C. Memo. 2006-87, 91 T.C.M. (CCH) 1079, 1082 (2006). Ms. Sham therefore retains the burden of proof on any deductions she claims in addition to those on her filed returns.

This is not a case where the facts presented on any issue are in equipoise; rather, here we find that the preponderance of the evidence resolves the issues in dispute, thereby negating the import of which party bears the burden of proof. See Dagres v. Commissioner, 136 T.C. 263, 279 (2011).

[*40] 2. Record-keeping

When deductions are in dispute, the taxpayer must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate items underlying their claimed deductions. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see also id. sec. 1.6001-1(e) (“The books or records * * * shall be retained so long as the contents thereof may become material in the administration of any internal revenue law”). The failure to keep and present accurate records counts heavily against a taxpayer's attempted proof. Rogers v. Commissioner, T.C. Memo. 2014-141, at *17.

Section 274(d) establishes higher substantiation requirements for expenses related to travel, meals, and lodging while away from home, entertainment, gifts, and “listed property”, defined in section 280F(d)(4) to include passenger automobiles and computers — i.e., many of the reported expenses at issue here. For expenses associated with “listed property”, a taxpayer must prove: (1) the amount of each separate expenditure with respect to such property; (2) the amount of each business use; and (3) the business purpose for an expenditure or use with respect to such property. 26 C.F.R. sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Section 274(d) provides that no deduction or [*41] credit under section 162 or 212 shall be allowed for these expenses unless the taxpayer substantiates these expenses by adequate records or sufficient evidence corroborating his own statements.¹⁵

For travel expenses, not only must a taxpayer substantiate the “[a]mount of each separate [travel] expenditure” and the time and place of the travel, but also she must substantiate the “[b]usiness reason for travel or nature of the business benefit derived * * * as a result of travel.” 26 C.F.R. sec. 1.274-5T(b)(2). A deduction for business gifts requires the taxpayer to describe the gift, to substantiate the amount, time, and “business reason for the gift or nature of business benefit derived or expected to be derived as a result of the gift”, and to provide information sufficient to establish the business relationship of the gift recipient, such as “name, title, or other designation”. Id. subpara. (5).

[*42] Ms. Sham has offered various records in the form of credit card and account statements to substantiate her expenditures. While she has cross-referenced many of these expenditures with self-generated spreadsheets that list the date and amount of certain expenses, her records do not contain any contemporaneous indication of the business purpose for any given expenditure — whether the expense was for a taxi, a meal, or something else. At trial Ms. Sham testified to the business purpose of her attendance at certain conferences, the expenses of which the Commissioner ultimately conceded had a business purpose. With few exceptions, see infra pt. II.E, we find that Ms. Sham otherwise failed meet her burden to establish the deductibility of her business expenses, and we are unable to apply the Cohan rule in these circumstances.

B. Income issues

1. Schedule C income for 2014

The only year for which the parties have not resolved the issue of Schedule C gross receipts by agreement is 2014. As we explain below, we find that the evidence at trial was sufficient to establish that Ms. Sham's gross receipts were at least $71,451, which the Commissioner in his answering brief conceded is the “correct amount”. This is the amount that Ms. Sham claimed on her late-filed return and that she affirmed at the beginning of the trial was the amount she [*43] contends is her gross receipts from self-employment. Given her position at trial, the Commissioner had no reason to pursue further the amount of her 2014 gross receipts.

However, in her post-trial brief Ms. Sham contends that her gross receipts for 2014 should be further reduced by $20,838, an amount that is the sum of two alleged mortgage payments made for Dr. Kukreja's benefit from the account ending in -0964 on September 15 and October 7, 2014 — a contention that the Commissioner had no occasion to examine at trial. While these payments do appear to be mortgage payments, this fact alone does not establish that these payments should be subtracted from Ms. Sham's 2014 gross receipts of $71,451. They might instead have been gifts she made to Dr. Kukreja, or payments of a debt she owed to him, or capital investments in his business; but we see no reason that they should necessarily reduce her gross receipts.

And if we were to entertain her late retraction of the $71,451 total and were to reconsider the quantity of her 2014 gross receipts, then we would apparently find a larger amount to be more probable than not. Deposits into account -0964 in 2014 that total $52,400 evidently constitute business gross receipts.¹⁶ Ms. Sham [*44] also conceded at trial and on brief that the $35,000 that Dr. Kukreja paid toward the rent on Apartment 16A constituted additional business gross receipts. This addition would yield a total of $87,400 of probable gross receipts. And the amount might have grown even further if Ms. Sham had not waited until after trial to disclaim what she reported on her return, and if the Commissioner had had the incentive and occasion to challenge Ms. Sham's reduced amount. The evidence shows other monies deposited in her name in other accounts she had at the time, which the Commissioner might have contended were additional gross receipts. Instead, the Commissioner limited himself to contending only what Ms. Sham had reported on her return and stated at the beginning of trial that only $71,451 constituted gross receipts to her. The preponderance of the evidence shows that Ms. Sham received at least $71,451 in gross receipts for 2014. Accordingly, we [*45] find that her gross receipts for 2014 are the amount she reported on her tax return: $71,451.

2. State tax refund

A refund of State tax is taxable to the recipient taxpayer only to the extent of any Federal tax benefit realized as a result of the deduction claimed for the State tax in a prior year. See sec. 111(a). The State of New York reported that in 2014 it made a State tax refund to Ms. Sham of $12,022 for State tax paid in 2010. Ms. Sham's 2010 Federal income tax return shows that she reported alternative minimum tax (“AMT”) for 2010, and State income tax is not deductible in computing the AMT income on which the AMT is based. Sec. 56(b)(1)(A)(ii). Therefore a taxpayer who itemizes State tax on Schedule A but is also liable for AMT does not receive a Federal tax benefit for the tax within the meaning of section 111(a). Ms. Sham raises two issues regarding whether she should include it in her income for 2014: first, she argues that she did in fact report the refund on her return for 2014 (but not on the appropriate line of the return); second, she disputes whether she in fact “received” the refund that New York reported it issued to her.

Ms. Sham initially took the position at trial that the $12,022 State tax refund for 2010 was included (in error) in the $71,451 of business gross receipts she [*46] reported for 2014. However, Ms. Sham properly reported refunds of State tax on the appropriate line of her tax returns for prior years. Moreover, her explanation of how she arrived at the amount of her gross receipts for 2014 (by arguing that only certain deposits into the account ending in -0964 were actually income to her) did not include a $12,022 deposit of State tax. We find that she did not include the refund of New York tax on her return for 2014.

Next, she argues that the Commissioner did not prove that she received the refund. In light of her first argument (that she reported the refund) and the evidence before us, we doubt the credibility of this assertion. Ms. Sham's New York income tax return for 2010 included a claim for a refund of $12,022. The only New York State tax return in the record is for 2010, so we are unable to determine whether Ms. Sham may have received, instead of a refund, a credit against any other New York tax liabilities. We do not find that Ms. Sham, having insisted that she reported the New York State refund as income for 2014, raised a reasonable dispute to New York's 1099-G that reported that refund. The burden of proof on this item therefore did not shift under section 6201(d). We find that Ms. Sham has failed to prove that she did not receive a State tax refund of $12,022 in 2014. However, whether she must include the refund in income for 2014 is a computational issue that depends on whether, on the basis of our findings for [*47] 2010, she will continue to owe AMT for that year. Ms. Sham will include the $12,022 in income for 2014 only to the extent (to be resolved in the Rule 155 computation) that she does not owe AMT for 2010. See, e.g., Ashkouri v. Commissioner, T.C. Memo. 2019-95, at *41.

3. Interest and dividends

The IRS determined from third-party reporting on Forms 1099 that Ms. Sham received small amounts of interest income in 2011 through 2014 and small amounts of dividend income in 2013 and 2014. Ms. Sham has conceded these amounts, which are set forth in detail in Appendix A.

4. Capital gain/loss for 2014 and 2015

The parties have agreed that Ms. Sham is not entitled to deduct capital losses from the TD Ameritrade account in the amounts of $157,600 for 2014 and $353,729 for 2015, both years for which she reported a $3,000 capital loss pursuant to the limitations of section 1211(b)(1). The Commissioner argues that the effect of Ms. Sham's concession of the TD Ameritrade account losses is that she is not entitled to deduct a $3,000 capital loss for either of those years. In her reply brief, however, Ms. Sham counters that she sustained other capital losses in her personal Ameritrade account. Ms. Sham has not substantiated any capital losses for 2014. However she did substantiate a short-term capital loss of $35,542 [*48] and a net long-term capital loss of $255 for 2015 in her personal Ameritrade account. Pursuant to sections 1211(b)(1) and 1212(b)(1), she is entitled to a capital loss deduction of $3,000 for 2015, and a corresponding reduction in the short-term capital loss (i.e., from $35,542 to $32,542) available as a carryforward. Sec. 1212(b)(2)(A)(i).

C. 2010 Schedule A miscellaneous expenses

For 2010 a taxpayer may claim an unreimbursed employee business expense as a miscellaneous deduction on Schedule A, pursuant to section 162(a). An employee is considered to be in the business of being an employee and may deduct expenses that are: (a) nonreimbursable, (b) related to the employee's trade or business of rendering services to the employer, and (c) ordinary and necessary expenses of such a trade or business. See Lucas v. Commissioner, 79 T.C. 1, 6-7 (1982). Expenses are “ordinary” when they are “normal, usual, or customary” in the taxpayer's trade or business. Deputy v. DuPont, 308 U.S. 488, 495 (1940). Expenses are “necessary” when they are “appropriate” or “helpful,” even if not “indispensable” or “required.” Ford v. Commissioner, 56 T.C. 1300, 1306 (1971), aff'd per curiam, 487 F.2d 1025 (9th Cir. 1973). Unreimbursed employee expenses are subject to the itemized deduction limitation of section 67(a) — i.e., the 2% floor.

[*49] The employee business expense deductions that Ms. Sham claimed must be disallowed because she did not substantiate the expenses. The preponderance of the evidence shows that she was unemployed (and collected unemployment benefits) for the entire duration of 2010. Even if the evidence showed that Ms. Sham continued to work as an employee for her former employer while she was at home “unwinding” investment positions in 2010 (which it does not), in order to be deductible, the expenses she paid would have to have been ordinary and necessary in the course of her business as an employee. See sec. 162(a). The expenses she reported for having a home office (rent and utilities) and for parking tolls, professional supplies and services, promotional gifts, computer expenses, and legal expenses (other than the $6,210 for the dispute with her prior employer that the Commissioner has conceded) are simply not substantiated as paid for any specific business purpose and therefore cannot be characterized as “ordinary and necessary”. Ms. Sham has not shown that any portion of her apartment was used exclusively and on a regular basis as the principal place of the business she carried on as an employee as required by section 280A(c)(1). She has offered no convincing explanation for any of the other expenses to explain how they are related to her alleged employer's business. Personal expenses are not deductible. Sec. 262; Hamacher v. Commissioner, 94 T.C. 348, 359 (1990). Therefore, other [*50] than those deductions the Commissioner has conceded, we find that Ms. Sham is not entitled to deduct Schedule A unreimbursed employee expenses for 2010.

D. Schedule A itemized deductions

1. Medical expenses

a. Medical expenses generally

Medical expenses which are “not compensated for by insurance or otherwise” are deductible, subject to computational limitations. See sec. 213(a) (for tax years 2010 through 2012, such expenses are deductible to the extent they exceed 7.5% of a taxpayer's adjusted gross income; for tax years 2013 through 2015, such expenses are deductible to the extent that they exceed 10% of the taxpayer's adjusted gross income).¹⁷ Ms. Sham bears the burden to prove that she paid any expense and that it was not reimbursed. See Weaver v. Commissioner, T.C. Memo. 1984-634, 49 T.C.M. (CCH) 249 (1984) (burden met where taxpayer testified that no claim for reimbursement was filed and record contained no evidence to the contrary).